Indian troops have shot dead three Muslim militants in Kashmir and freed seven hostages they seized after going on a killing spree, the army said Thursday.

Two militants were shot on Wednesday evening during a fierce gun battle, but three male hostages were killed by their captors.

"The operation is over. We killed third militant early today (Thursday)," Indian army spokesman Lieutenant Colonel S.D. Goswami told AFP from the stand-off on the outskirts of Hindu-dominated Jammu city.

The army had earlier said only women and children were taken hostage.

On Wednesday, police said the militants opened fire on an army post killing one officer and wounding two other soldiers.

The soldiers retaliated but the militants escaped in a taxi rickshaw and later killed its driver and two other civilians.

They then barricaded themselves in a house and took 10 people hostage, the police said.

Goswami said a total of 10 people were killed -- three militants, six civilians and an army officer.

"The dead militants are believed to be Pakistani nationals and most probably members of Lashkar-e-Toiba," he said, referring to a hardline Islamic group.

Police chief K. Rajindera Kumar said the militants had entered Jammu from Pakistan after cutting through a border fence on Tuesday.

India accuses Pakistan of arming and funding militants who have been waging an insurgency in the region since 1989. Islamabad denies the charge.

The insurgency has left more than 43,000 people dead by official count. The violence has dropped sharply since India and Pakistan started a peace process in 2004.

Meanwhile authorities briefly relaxed a curfew in sensitive parts of Srinagar, the biggest city in Indian Kashmir, for the first time since its imposition on Sunday.

Residents queued outside bakeries, groceries and medical stores.

On Wednesday, during a period when the curfew was lifted, security forces fired teargas and warning shots at demonstrations against Indian rule.

The latest troubles were triggered by a state government plan made public in June to donate land to a Hindu shrine trust in the Kashmir valley. The decision was later reversed after massive Muslim protests, angering Hindus.

Since June, at least 39 Muslims and three Hindus have died in police shootings on protesters in the Kashmir valley and the mainly Hindu area of Jammu.